International taxation and takeover premiums in cross-border M&As

Cross-border M&As can trigger a higher international taxation of the target's income. Non-resident dividend withholding taxes may be imposed by the target country, while additional corporate income taxation can be imposed by the acquiring country. This paper examines how these additional tax liabilities affect takeover premiums and thus the gains to target shareholders. Our evidence suggests that takeover premiums fully reflect non-resident dividend withholding taxes, while they reflect corporate income taxation by the acquiring country less than fully. The incidence of non-resident withholding taxation thus appears to be entirely on target shareholders. Hence, withholding taxes do not seem to serve the purpose of taxing foreign acquirers. This evidence is consistent with previous findings that the gains of M&As primarily accrue to target shareholders.